Many clients are aware the IRS permits annual exclusion gifts, up to $13,000 per person (2011). Many clients also believe, mistakenly, that a parent can gift up to $13,000 per year to each of their children without the gift affecting the parents’ Medicaid eligibility. Annual exclusion gifts are a tax concept, not a Medicaid planning device, and such gifts, while they may be fine for tax purposes, will affect the donor’s Medicaid eligibility.

2. More clients should promptly apply for Medicaid assistance upon entering a nursing home.

This is true for two reasons. First, the application can save the client money.

Example. Husband and wife have $60,000 in assets. Wife enters care center on July 1. After H & W spend $40,000 on wife’s care, they complete a Medicaid application. Medicaid examines their assets as of July 1 and allocates half of the assets, or $30,000, to each spouse (the result in this example). Thus, wife need only have spent down $30,000 (less the $2,000 she is permitted to keep) paying for both her and her husband’s care. Instead, in this example she and her husband have spent $40,000 paying for her care alone.

Second, it is much easier to compile and submit the necessary information upon admission, than it is to have to recreate it months (and sometimes years) later.

3. When children (and others) provide care to their parents, it should be done pursuant to a written agreement entered into prior to the time the services are performed.

Example. Imagine two identical households facing one another across a suburban street. In household A, a daughter provides significant assistance to her mother, helping her bathe, providing transportation, picking up groceries and medication, paying her bills, insuring that her lawn is maintained and snow is shoveled. For these services, mom pays her daughter $y per month. There is no written agreement. In household B, a son provides significant assistance to his father, helping him in and out of the shower, providing transportation, picking up groceries and medication, paying his bills, insuring that his lawn is maintained and snow is shoveled. For these services, dad pays his son $z per month, pursuant to a written agreement entered into some time ago. Should the mother in household A need Medicaid assistance, payments made to her daughter may be characterized as impermissible transfers. If the father in household B needs Medicaid assistance, the payments made to his son may well be permissible, since they were performed pursuant to a written agreement entered into (and signed and notarized) prior to the time the services were performed.

More people should consider using so-called “care contracts”. They are awkward to discuss and implement, they create taxable income, and they arguably result in payment for care adult children and in-laws should provide parents out of love and respect. On the other hand, they clarify expectations among the parties, and over time, can be an effective Medicaid planning technique.

4. True or false? A person seeking Medicaid assistance cannot give away their home or other assets.

It’s not quite that simple. Oversimplified, it is true that it is impermissible for a parent (or parents) to transfer the family home to an adult child while attempting to qualify for Medicaid eligibility. However, there are a number of transfers that are permissible (and frequently overlooked):

Assets can be transferred between spouses without penalty.

Assets can be transferred to an applicant’s blind or disabled child.

Assets can be transferred to a trust for the sole benefit of a spouse, blind or disabled child or individual.

Assets can be transferred into a so-called “first party special needs trust” or “payback” trust for a disabled individual under age 65.

A home can be transferred to a spouse, child under the age of 21, sibling of an applicant who lived in the home for one year prior to the applicant’s institutionalization and who had some ownership interest in the home, or an adult child who lived in the home at least two years before the parent enters a nursing home, so long as the adult child provided sufficient care to the parent to allow him or her to remain in the home rather than be institutionalized (a letter from a physician can verify this).

5. I’ve heard that Medicaid recipients may lose their home. Why?

The rules regarding Medicaid eligibility, estate recovery, and the family home are somewhat complicated and frequently misunderstood. When a person begins receiving Medicaid assistance, the State keeps track of the value of the services provided. Upon the death of the recipient, the State may attempt to recover the value of those services in certain situations. In these situations, the State has the same rights as a creditor of the recipient’s estate, and while they prefer not to do so, if necessary the State can compel the sale of the family home to recover the value of Medicaid services provided. (The family home, since it is an exempt asset, is frequently the last asset remaining to a Medicaid recipient.) The State can also recover from trusts in which the recipient is the grantor and a beneficiary.

However, the State cannot recover if:

The recipient was under age 55;

The recipient has a surviving spouse (the State may recover after the death of the surviving spouse, but generally has not done so), or child under age 21 or who is blind or permanently and totally disabled.

Moreover, the State may defer collection upon the signing of a consensual lien in situations where an adult child lived in the home two or more years before the parent enters a nursing home, resided in the home on a continuous basis since that time, and provided care to the parent sufficient to allow the parent to remain in the home rather than be institutionalized.

The State may also authorize deferment of estate recovery for undue hardship upon the signing of a consensual lien where an individual has an equity interest in the home and resides in the home as their primary residence, or a disabled individual (not a child) resides in the home as their primary residence, irrespective of an equity interest.

Finally, the State may waive estate recovery for undue hardship if income is limited and the property is the sole income-producing asset and source of support for the survivors (such as a family farm or other family business, which produces a limited amount of income).

6. If I meet the “adult child two year care provider” rule for Medicaid eligibility purposes, and the family home has been conveyed to me, the State cannot recover upon death of my parent, right?

Wrong. While the State may defer collection (see number 5, above), the State takes the position it can otherwise engage in estate recovery, even though the initial conveyance was a permissible and completed transfer. To the best of our understanding, this concept is presently under review by the State, meaning the result may change (and it should).

7. If my parent’s (or parents’) estate plan provides a right of first refusal authorizing one of their children to buy the family home for less than fair market value (perhaps, for example, because the child given such right has rendered extraordinary care to one or both parents), Medicaid must respect the right of first refusal, correct?

Generally, no. The State takes the position that its estate recovery right supersedes any such arrangement.

8. Once my parent is securely on Medicaid, there is nothing more that need be done, right?

Wrong. If your spouse or one of your parents qualifies for Medicaid assistance, you should make sure the community spouse updates his or her own estate planning documents, including disinheriting the institutionalized spouse, where appropriate, while at the same time respecting the institutionalized spouse’s elective share and other rights. If the community spouse predeceases the institutionalized spouse, the last thing your family may want is a will or trust wherein the community spouse leaves everything to the institutionalized spouse, negating Medicaid eligibility.

In addition, prior to a spouse or parent entering a care center, the family should make sure that financial and medical powers of attorney are in place, and that appropriate agents are designated. Many times, but certainly not always, an institutionalized spouse may not be in the best position to serve as an agent for the community spouse.

9. Medicaid planning that bogs down in a fair hearing request may not be particularly good Medicaid planning.

As with most everything else in life, be wary of Medicaid planning techniques that sound too good to be true. Attorneys, financial advisors, annuity salesmen and others who promise you complete protection from any nursing home concerns, or who encourage you to engage in planning techniques “not yet proven”, but that “should work”, often miss the mark. Obtaining Medicaid eligibility is difficult enough, and having to participate in so called “fair hearings” to prove entitlement to eligibility often means months of delays, significant anxiety, and care center personnel who are frustrated they are not being paid.

10. In some situations, the best planning is not to rely on Medicaid at all.

For many people, the purchase of long term care insurance can be a real blessing. Individuals with even modest wealth can sometimes privately pay for long term care because they have significant income, and thus can weather some depletion of their assets. Finally, in what may be a new and helpful trend, there are now some companies offering to pay a person’s nursing home expense for life in exchange for a single one time payment, which may be less than the Medicaid “spenddown” amount.